This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.

Sunday, March 10, 2013

Badly Written Buy-Sell Agreement Did Not Provide for Recovery of Overpayments to Departing Shareholder

The Lord Giveth and the Lord Taketh Away,

but a Badly Written
Buy-Sell Agreement Might Not Take Away

In a recent decision of the
Sixth Circuit Court of Appeals, it examined a Buy-Sell Agreement of a
professional practice that did not, by its terms, require a departing physician
to pay funds into the practice to account for excessive withdrawals therefrom.There having been imposed no obligation by
contract, the court would not create one.Neuro-Spine Solutions, PC v.
Freund, 2012 WL 5382902 (6th Cir. Nov. 5, 2012).

Neuro-Spine Solutions, PC, a
Tennessee professional corporation, had as its shareholders Freund, he holding
35% of the shares, and Lorio, he holding 65% of the corporation’s shares.There was a falling out between Freund and
Lorio, and Freund withdrew from the corporation.A variety of claims having been dismissed or
resolved by the trial court, the primary issue on appeal was whether Freund was
required to pay funds over to Neuro-Spine consequent to the fact that it was
balance sheet insolvent (i.e., debt
exceeded assets) or because he had been over-compensated through the time of
his withdrawal.

Under the terms of the Buy-Sell
Agreement, upon Freund’s withdrawal, Lorio had the option of effecting the corporation’s
dissolution or buying Freund’s shares pursuant to the agreement’s terms; he
elected to purchase the shares.The
agreement defined value in terms of a trio of figures, namely collected fees,
cash on hand and tangible assets.Telling for this dispute, the value of the tangible assets was to be
calculated without including any company liabilities.

With respect to the
determination of the stock’s value, the Court of Appeals affirmed the
determination made by the trial court.In that the definition did not account for company liabilities, and
further did not provide for any payment by the withdrawing shareholder to the corporation,
that value stands.

As to a claim that Freund had
been over-compensated vis-à-vis the shareholder agreement and rejecting an
assertion that there could be a claim for repayment in excess of salary, the
court noted that the shareholders agreement:

Rather than requiring a repayment by
the terminating shareholder, the Shareholders Agreement provides that such
terminating shareholder “receive no monies” in exchange for a sale of the
stock.The agreement contains no
provision for a repayment of overdrawn compensation, in the event Dr. Freund
was not in line with the pre-arranged payouts.

With respect to a loan made by
Neuro-Spine to a separate corporation owned by Freund, Neuro-Spine sought to
enforce that obligation against Freund.At trial, the court found that Freund had not agreed to be personally
liable on that obligation, and that determination was affirmed by the Court of
Appeals.

There was also a somewhat
unclear claim with respect to a line-of-credit owed by Neuro-Spine on which
Freund, along with Lorio, was a personal guarantor. Regardless, the court upheld a grant of
summary judgment in favor of Freund with respect thereto.

Aside from the details of this
ruling, at least a pair of points of guidance come forth.First, shareholder buy-sell agreements and
similar documents will likely be carefully scrutinized by the courts.To the extent a remedy is not provided for a
particular fact situation, the courts will not provide relief that has not been
negotiated and agreed to.Second, when
entering into multiple agreements as to the same operative facts, it is
absolutely crucial that the agreements be consistent both internally and with
respect to one another.